We now examine the impact of using value-added trade data compared to traditional
gross trade data to examine exchange rate pass-through. Fluctuations in exchange
rates can have significant effects on the competitiveness of foreign producers who
export to the US market. As long as there are rigidities in nominal wages and prices,
reductions in the nominal value of an exporter’s currency will lower its relative costs of
production and the relative price of its exports. The magnitude of the resulting change
in the demand for US imports will depend on the substitutability of imports from
other countries and on the currency denomination of the costs of these international
competitors.